Cohen & Steers Total Return Realty Fund

Ticker: RFI, Buy below $13.50.

Why I Would Buy

1.       Deep Discount– Cohen & Steers Total Realty Fund is a closed end fund that currently trades 8% below its net asset value (NAV).

2.      Generous Dividend – RFI sports a 7% dividend yield which is derived entirely from income and capital gains (return of capital is not part of the fund’s payout). The dividends are paid monthly.

3.      Low Expenses – The fund charges just 0.84% of assets as fees. In addition, the fund’s discount to NAV further diminishing the impact of these already low fees .

4.     No Significant NAV Erosion – Most closed end funds suffer deep erosion of NAV over its lifetime, in the case of RFI however this hasn’t occurred to any significant degree. The NAV at IPO in 1998 was $15, currently it is a little over $13, and this despite paying very generous dividends during the intervening 18+ years.

What Could Go Wrong

1.       Underlying Assets May Be Overpriced – RFI invests in REITs and other Real Estate related securities. REITs are currently at a market high, setting the stage for a possible correction.

2.      Interest Rate Sensitivity –  REITs are an asset class that is sensitive to interest rates and would likely suffer price declines during a rising rate environment. In addition, the fund utilizes leverage, which exacerbates it’s interest rate sensitivity.

Disclosure: I am long RFI, please read additional disclosures here before taking any action based on this post.

Enel Generacion Chile

Ticker: EOCC, Buy below $23.

Why I Would Buy

1.      Strong RoE – Enel Chile has generated double digit annual returns-on-equity during the past decade.

2.      Cheap – Trades at less than 9 times earnings.

3.      Dividend – Pays a 3+% dividend.

4.      Defensive Investment  – Regulated utility that generates and distributes power in large parts of Chile.

5.      Currency Diversification – Earnings are in Chilean pesos, this provides an hedge against the dollar via a relatively stable currency.  

 What Could Go Wrong

1.       Emerging Competition – Solar energy is emerging very strong in Chile with recent reports of surplus energy generation,  this could pressure Enel’s hydro-electric and coal-fired generation.

2.      Credit Ratings –  Credit ratings are on the lower side of investment grade (BBB+ by  Fitch and S&P).

3.      Controlling Interest  – Enel Italy owns 61% of this utility, interests of the parent may not always align with that of minority shareholders.

Disclosure: I am long EOCC, please read additional disclosures here before taking any action based on this post.

Magna International Inc

Ticker: MGA, Buy below $50.

Why I Would Buy

1.     Cheap – Magna trades at 8x current earnings and an astounding 5x forward earnings!

2.      Investment grade credit rating – Magna’s long term senior debt was already investment grade, it was recently upgraded another notch by Moody’s (from Baa1 to A3).

3.      Upbeat Analyst Consensus–5 star “strong buy” rated by S&P,  9.7  equity consensus score by Reuters’ (at Fidelity) .

4.      Low Debt – Just 25% of the capital structure is comprised of debt.

5.      Low Payout Ratio – Magna pays out less than 20% of its earnings as dividends.

 What Could Go Wrong

1.       Trump and NAFTA – About 60% sales of Magna’s sales is spread across Canada, US and Mexico, enough said!

2.      Highly Cyclical –  The automotive industry is highly cyclical, Magna is probably riding the crest of an industry peak right now ( the company lost money during 2009 recession).

3.      Meagre Returns of Equity – RoE is my favorite metric for picking stocks, Magna has earned anemic single digit returns on this metric.

Disclosure: I am long MGA, please read additional disclosures here before taking any action based on this post.

Medley LLC 6.875% Senior Notes

Ticker: MDLX, Buy below $25.

Why I Would Buy

  1. Yield – These notes (baby bonds) yield 6.875%! Despite the high yield they are relatively safe.
  2. Investment grade credit rating – The issuer Medley LLC has been rated “A-” by Egan-Jones Rating Company.
  3. Below Par – The baby bond  has a face value of $25 but currently trades below that, creating an opportunity for capital gains.
  4. 3 Year Call Protection – These bonds cannot be called earlier than 8/15/2019.
  5. High Insider Holdings – Insiders hold about 75% of Medley LLC, making it unlikely that they would permit a default or bankruptcy.

What Could Go Wrong

  1. High Yield – 6+% yield is rather high for a safe bond, there could be risks here that I am missing.
  2. Credit Rating Agency –  The A- credit rating was issued by a smaller rating agency. Egan-Jones is not one of the top three rating agencies, however it is a Nationally Recognized Statistical Ratings Organization (NRSRO) just like the three more well known ones.

Disclosure: I am long MDLX, please read additional disclosures here before taking any action based on this post.

 

Daimler AG

daimler

Ticker: DDAIY, Buy below $80.

Why I Would Buy

  1. Cheap – Daimler trades at less than 9 times trailing earnings, 1.3 times book and below 0.5 times trailing sales!
  2. Generous R&D Spend – Daimler consistently spends between 4 to 5% of revenues on research and development. In 2015 this amounted to an astounding 6.5 billion Euros.
2011 2012 2013 2014 2015
5.3% 4.9% 4.7% 4.4% 4.4%
  1. Strong Returns on Equity –Daimler  has posted impressive RoE numbers:
2011 2012 2013 2014 2015
14.6% 17.4% 20.1% 16.4% 15.9%
  1. High Investment Grade Credit Ratings – Daimler enjoys strong credit ratings on its long-term debt (S&P: A-, Moody’s: A3, Fitch: A-).   
  2. Low Payout – Despite a dividend greater than 5%, the payout ratio is at about 40%.

What Could Go Wrong

  1. Poor Cash Flow – The company has surprisingly been negative free cash flow for the past 5 years. The poor cash flow generation is exemplified by it’s operating cash flow in 2015: it was a miniscule 222 million Euros earned on revenues of 149+ billion Euros!
  2. High Beta – Despite having a diversified product line (the ubiquitous Freightliner trucks for example are a part of Daimler’s offerings), a majority of profits are derived from its luxury car business. Luxury vehicle sales tend to suffer during economic downturns; for instance during the financial crisis in 2008 Daimler’s profits cratered and in 2009 it reported a loss.

Disclosure: I am long DDAIY, please read additional disclosures here before taking any action based on this post.